Observations focused on the problems of an underdeveloped country, Venezuela, with some serendipity about the world (orchids, techs, science, investments, politics) at large. A famous Venezuelan, Juan Pablo Perez Alfonzo, referred to oil as the devil's excrement. For countries, easy wealth appears indeed to be the sure path to failure. Venezuela might be a clear example of that.

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The Perverse Entrapment Of Foreign Exchange Controls For Both The Government And Multinationals

February 17, 2013

Being a multinational in Venezuela is not easy. The numbers are outstanding, the sales and/or return on equity are fabulous and you are the envy of the region.

Except…

It has been five years since the Chavez Government last allowed you to repatriate earnings. Since then, those fantastic earnings have followed a roller coaster ride. You used to register them at the request of your accountant at the parallel swap rate, which was banned in May 2010, while it was hovering above Bs. 8 per US$. At that moment your earnings were actually revalued to the Sitme rate of Bs. 5.3, only to be devalued last week to Bs. 6.3, as SITME was disappeared and only the official rate exists now.

But wait, the rate exists, but companies have had no access to it for repatriation for the last five years. Thus, they are “virtual” earnings, virtual revenues, virtual returns on equity, they only exist in your books, but can not be transferred to your home office, let alone distributable to your shareholders. They only exist in local currency. And no end in sight.

CADIVI has accumulated US$ 2.8 billion in requests for dividend repatriation and there is an estimated US$ 13 billion total repressed in local currency (at Bs. 4.3 per US$). But after five years, most multinationals are learning that saying “We are here for the long term” sounds tough and audacious, until it feels that this is the long term and you have lived through the whole thing. And it ain’t over…

So, they are trapped, apparently forever.

But the irony is, their trap has by now also become the Government’s trap.

You see, one of the main reason the Government can not create any sort of alternative, parallel, whatever you wanna call it, market, is that currently, all of these multinationals register those dollars at Bs. 6.3 (as of two days ago). This means that they lost 15.9% of their dollar earnings this week. (Only that much, because their accountants probably forced them before to register the Bolivars at the highest “legal”rate of Bs. 5.3 per US$)

But if the Government allowed any sort of floating market, that went to the levels of the black one, these companies would lose say 73.5% of their earnings at Bs. 20 per US$. And if the Government allows any form of parallel real market, that is what accountants will tell these companies they have to do and use. And if they are forced to take this huge loss, hey! they might as well go to the market, buy the foreign currency and take the money home. At least it will be real foreign currency and in their pockets!

But that will only push the new rate higher, as all these companies scramble to buy!

Which is the real reason the swap market rose sharply in 2010 before the Government shut it down. Companies began realizing that their earnings were being devalued day after day, so they mostly decided they might as well take the money home, because it became clear there would be no Government autorized repatriation. When the Government shut down the market, they actually had to revalue from around Bs. 8 to Bs. 5.3. Their numbers looked great all of a sudden! But they were all in Bolivars.

But for the Government, it became a trap. Before, the swap rate would slide in time, companies would adjust, buy what they could, and manage.

But any approval for an “alternative” market implies a huge amount of money that would look to buy after almost three years of being frozen out of any form of dividend repatriation. The new rate would soar, would set prices and the spiral would continue.

A virtuous or vicious circle or spiral for both the Government and multinationals. A trap. Except companies only care about their bottom line and the Government about staying in power. So the Government keeps digging deeper, until the hole will reach the other end of the planet.

40 Responses to “The Perverse Entrapment Of Foreign Exchange Controls For Both The Government And Multinationals”

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Did you know that when you inflation-adjust all monetary items (loans, bank deposits, etc.) in Venezuela on a daily basis in terms of the Daily CPI then Bolivar monetary items in Venezuela would maintain their real values constant over time? It would require the Venezuelan Central Bank to inflation-adjust the overnight cash balance in commercial banks in terms of the Daily CPI. Chilé currently inflation-adjusts 25% of their money supply on a daily basis. All housing loans are inflation-adjusted on a daily basis in Colombia.

If you were a multinational and all your sales in Venezuela were at the parallel rate, then it would be the same as being in any country without exchange control, e.g. Germany. You would take your dividends out at the parallel (freemarket) rate.

So:

If you were a multinational in Venezuela, divide your capital invested in Venezuela in two parts:

1. the part of your capital you can maintain at the parallel rate and
2. the part of your capital you can maintain at the official rate.

The net income you make from the part of your business you maintain at the parallel rate, you repatriate at the parallel rate, just like you would do it as if you were invested in Germany.

The net income you make from the part of your business you maintain at the official rate, you re-invest in Venezuela for the long term in either well located and well maintained fixed property or a profitable business or businesses.

Whenever the Venezuelan economy normalises in the future, all your capital and retained earnings would be 100% maintained and you will never lose one Bolivar or one US Dollar in real value over time.

m-astera, Thank you for the information. The following is a quote from the East Asiatic Company´s 2012 interim report:

“Outstanding royalties and dividends
During Q3 YTD 2012 no royalty and/or ordinary dividend payments
from Plumrose were approved by the Venezuelan authorities. However,
in March 2012 an extraordinary dividend from Plumrose was paid to
the EAC parent company amounting to USD 12m. The dividend was
paid using USD purchased through Venezuelan government bonds in
2011.”

“Dividend paid to the EAC Parent Company in March 2012 amounted to VEF 63.6m or equivalent to USD 12.0m (VEF/USD 5.30). However, the applicable rate for translation
purposes was the official exchange rate of VEF/USD 4.30. Consequently, the cash flow impact amounted to USD 14.8m or DKK 85m respectively.”

I read somewhere else that this is possible by buying government bonds and then selling them in the secondary market for USD.

It seems to me that all foreign companies can do this to repatriate dividends.

That was a one time event, the Government stopped selling those bonds at that time. There has been no legal mechanism of doing that since then. I repeat, today there is no legal mechanism of repatriating dividends, only by going to the illegal black market can a company repatriate dividends.

Thank you Miguel. Do banks in Venezuela supply the service of safety deposit boxes? Companies and individuals can then buy US$ on the black market and keep them in the safety deposit boxes instead of in bank accounts that may be expropriated by the government – twice in Argentina.

The cash market is not very active, because then you will violate the law here. I dont think you can buy much in the cash market, it is all wire transfers. What most companies have done in the last two years is buy real state or other companies as a way of protecting their local currency assets.

Because he doesn’t want to wait 12 years before
some president, worried by the political situation
produced by low world prices for Venezuela’s monoculture,
decides to create a myth and distraction mechanism
by bringing those bones back

More accurately, he tweets he returned home after more than 2 months of cancer treatment in Cuba. It could easily be someone just hijacked his account. Maduro is a good candidate, as are other pretenders, plus all his loyal henchmen.

There is one “weapon” that multinationals have and that is the transfer price for goods that they buy from themselves, e.g. from / through their home base, or from / through subsidiaries in countries that do not have exchange controls. Doesn’t matter if they produced it themselves or bought from 3rd parties first.

Transfer pricing can be adjusted up or down and earnings can be manipulated from country to country. It is also done to take advantage of the favorable taxes in one country vs. another, i.e shift earnings to a country with a lower tax rate by lowering the transfer price.

I know that this is not news to you, but for completeness’ sake I thought you could have mentioned it in your otherwise outstanding post.

Ok. So this guy who hasn’t been able to shut up for five minutes for the past 14 plus years, who blathers on for hours on end, who tweets to his half million followers every time he farts, who, like Castro, thinks his every thought is a revelation, is suddenly silent on all levels for two months. I would suspect he suffered more than just a loss of voice if he couldn’t even tweet. That stupid grin on his face probably means he had brain damage too.

Venezuela should rejoice. At the very least there will be fewer TV interruptions.

Most gold is just hoarded. The huge run up in gold prices requires a constantly increasing amount of gold hoarding, at some point demand stops increasing, production catches up and prices drop. Any gains need to be paid off by new investors, it pays no dividend.

I wonder why multinationals are still operating in Venezuela? To me, the only answer is that they don’t wait and use the black market. This mean that there should be somewhere (out of Venezuelan territory, I guess) some kind of a well organized market. And I also think that the supply side of that market must be filled somehow by government friendly agents or even PDVSA itself. That’s my highly suspicious hypothesis.

I would guess they take the long view, and that some sales are better than no sales. They figure at some point the economy will straighten out and that whatever profits in $$ they will eventually return home are likely still going to be profits, whether it takes 2-5-10 or 20 years.

If they leave, they leave a market to others that will be difficult to regain at a later date. Most of their employees are paid in BSF, so as long as teh books are in black and not red (locally), the better, albeit distasteful, option is to continue.

Friend, Michael, I think there is a group of citizens who do not finish mousing, drunkenness after 2012 and the elections must wait to receive the impact of the devaluation in reaacionar pocket, in my personal opinion no transnational go to Venezuela, since the cost of output exceeds its investment in this land of grace, however no one will invest a dollar $ without legal security.

“Miguel my friend: There is a segment of the population that still have not gotten over the hangover from the 2012 elections and need to wait until the devaluation hits their pockets. In my personal opinion no transnational will want to come to Venzuela since it costs more to produce here than the investment needed in this land of grace, and no one will invest a dollar here without any legal security”